10 years of Economic and Monetary Union: a
resounding success but testing times ahead

The euro is a resounding success. The protection
provided by an international currency with a market of nearly 320 million
people, supported by sound public finances and stable macroeconomic policies, is
particularly welcome in these times of uncertainty and worrying increases in the
prices of energy and food. But as we complete 10 years of Economic and Monetary
Union (EMU), we must acknowledge that there is still work to be done. The euro
area’s governance and coordination of economic policies must be improved.
This will involve both deepening and broadening economic surveillance
arrangements to guide fiscal policy over the cycle and in the long term and, at
the same time, address divergences in growth, inflation and competitiveness. We
also need to better project our voice in the global arena, to reflect the
euro’s weight as an international currency used well beyond its borders.
Only then will the benefits of the single currency become fully apparent to the
citizens of the euro area.

"EMU is a solid
construction and a remarkable achievement. But the experience of its first
decade shows that economic policy decisions in one country may have important
effects on others. Therefore we need to keep improving the economic governance
of the euro area through strong and binding political commitments. Over the last
three years we have revised the instruments of coordination, the Stability and
Growth Pact and the euro area dimension of the Lisbon process. We now need to
strengthen our coordination of budgetary and economic policies. We also need to
step up our international economic strategy. We owe it to the citizens of Europe
to ensure that the euro area becomes a vibrant example of growth and dynamism,"
said Joaquín Almunia, European Commissioner for Economic and Monetary
Affairs, adding: "I intend to drive this debate forward with the Member
States, the Council and the European Parliament during the French Presidency and
to come back with proposals."

On 2 June 1998, almost exactly 10 years ago, EU leaders took the historic
decision to launch the euro on 1 January 1999, with the participation of 11
European Union countries.[1] At
the same time, they established the European Central Bank with effect on 1 June
1998.

As we mark the 10th anniversary of what EU citizens see as one of
the most potent symbols of European reconciliation and integration, the
Commission today adopted a Communication – EMU@10: successes and
challenges after 10 years of Economic and Monetary Union – that looks
at the benefits but also, and more importantly, at the improvements needed to
ensure that EMU works even better in the next decade and beyond. The
Communication is accompanied by a staff Report, which provides a systematic
review backing the policy analysis.

The euro has delivered sustained price stability on a scale that many, if not
all, of its members had never previously enjoyed, notwithstanding the recent
spurt in inflation caused by soaring global food and energy prices. Interest
rates have come down to an average of 5% from around 9% in the 1990s and the
abolition of exchange rate costs and risks has spurred internal trade, which now
accounts for one third of the euro area's GDP, up from one quarter 10 years ago.
Similarly, intra-area foreign direct investment now stands at one third of GDP
compared with one fifth before, showing that the area's attractiveness has
increased markedly. Lower costs of capital have also boosted total private and
public investment levels to 22% of GDP in 2007 – a level unseen since the
early 1990s. Public deficits have fallen to a record low 0.6% of GDP in 2007,
compared with an average of 4% in the 1980s and 1990s. Together with the Lisbon
Strategy for Growth and Jobs, the overall macroeconomic stability and sound
budgetary policies have enabled the euro area to create nearly 16 million jobs
since 1999, more than in any recent decade, bringing the unemployment rate down
to around 7%.

An agenda for unleashing the full potential of EMU

Nonetheless, we can and we must improve the functioning of EMU. Growth has
been less than impressive in some countries and productivity trends have lagged
behind the United States. Structural reform efforts must be intensified and
there remain substantial differences among countries. Despite the growing
importance of the euro as an international currency, the euro area is still
failing to make its voice heard in international fora. Public perceptions of the
euro also do not do justice to its benefits in terms of economic stability, more
transparent prices, cheaper credit and easier travel. Finally, the challenges
posed by our ageing population and globalisation, which are becoming more
pressing and are compounded by the ongoing turmoil on the financial markets and
rising food and energy prices, make improving the performance of EMU not just a
target but an imperative.

A domestic agenda

Deepening and broadening economic surveillance. Deeper
surveillance means improving the Stability and Growth Pact's 'preventive arm' to
guide fiscal policies over the cycle and take into account the costs that a
shrinking and ageing population will put on future generations. We need to take
a harder look at the quality of public finances to ensure taxpayers' money is
put to good use. And we also need to extend the existing peer monitoring system
beyond fiscal policy, in order to tackle economic imbalances and divergences
among euro-area members in a timely manner.

Better integrating structural reforms in the co-ordination process. The euro
area has a special interest in the success of reforms, including financial
integration and better functioning labour markets. More use could be made of the
structural reform incentives built into the 2005 revision of the Pact, without
jeopardising its function as an anchor for fiscal
discipline.

Enhancing the euro area's international role

The euro area needs to define a strategy regarding the international role of
the euro and make its voice heard on global issues. As a rule it must agree, and
stick to, common positions in order to speak with one voice. Ultimately it must
consolidate its external representation and aim to have a single seat in
international financial institutions and fora.

Promoting effective governance of EMU

On the political front, although the euro area does not need any new
institutions, it does need better governance. Better coordination and
surveillance of national economic and budgetary policies is needed within the
ECOFIN Council and the Eurogroup, particularly in view of the progressive
enlargement of the euro area, in order to address imbalances and promote
structural reforms that foster adjustment, stability and growth.

The Commission aims to promote a frank and forthright debate in the second
half of 2008 with a view to finding a consensus on all these issues and will
come forward with appropriate proposals.